Liquidity Risk is the risk that an investment may not find a ready buyer and, as such, may have to be disposed at a substantial loss. To reduce this risk, mutual funds try to stay away from securities which do not have a ready buyer, are not listed, are listed but are not actively traded and are very volatile.
Interest Rate Risk is volatility of bond prices that results from changes in interest rates. Bond prices are inversely related to interest rates. When interest rates rise, bond prices fall and vice versa. Interest rates are affected by various factors such as the expected direction of inflation, monetary policy, political risk and other economic factors.
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